The Dow Jones Industrial Average fell 78.48 points, or 0.60 percent, to close at 13,046.14, led by Alcoa and Chevron . The Dow was down 107 points at its session low.

The S&P 500 slumped 10.11 points, or 0.72 percent, to end at 1,392.78, closing below the 1,400 milestone. The Nasdaq slipped 12 points, or 0.39 percent, to finish at 3,063.32.

The CBOE Volatility Index, widely considered the best gauge of fear in the market, rose above 15.

Most key S&P sectors finished in the red, led by energy and materials, while consumer staples eked out a gain.

“I don’t think this is a sign of a bigger correction,” said Tim Speiss, head of personal wealth advisers with EisnerAmper. “Once again, the turbulence is coming from overseas…we might see a flattening, but we’re going to remain thoroughly stable.”

Speiss said the global slowdown may affect manufacturing data in the U.S. in the short-term, but an improving employment environment and rising consumption among consumers will likely counter some of the weakness.

“For the moment, the U.S. recovery seems to be very much independent and continues to sustain itself,” he said.

Investors have been on edge all day following a report that showed China's manufacturing sector activity slumped in March for the fifth-straight monthwhile euro zone composite PMI showed an unexpected contraction, led by a decline in French and German factory activity.

Adding to woes, Portugal was hit by a 24-hour strike in protestat austerity measures. Meanwhile, Italy’s largest trade union has also called for a strike against a reform of the labor marketin the country.

“If you look at what happened after the last LTRO [Long-Term Refinancing Operation], Portugal was one of the few markets that didn’t participate in the nice rally in bonds that you saw in some other countries — Italy and Spain for example,” said Rob Carnell, chief international economist at ING. “It does look as if people are pushing towards the idea of a bailout later on in the year, maybe the third quarter of this year.”

Energy stocks have been under pressure in the last few days amid concerns over a slowdown in China, which consumes about a quarter of the world's oil. As a result, oil services companies have posted big declines for the week including Baker Hughes , Nabors and Schlumberger .

Dow component McDonald’s edged lower after the fast-food chain announced CEO Jim Skinner will retire on June 30. Shares of the company have spiked over 200 percent since Skinner's reign in late 2004.

On the earnings front, FedEx slipped after the economic bellwether warned that it had lowered its outlook for the rest of the year because of weak economic growth. Still, the package delivery company topped earnings estimates. Rival UPS also edged lower.

Discover Financial rallied after the credit-card provider reiterated their expectation of 10 to 15 percent annual growth in earnings per share. The firm also posted better-than-expected earnings. Meanwhile, at least two brokerages raised their price targets on the company.

Dollar General gained after the retailer beat results and added it expects its upward momentum to continue throughout the year.

Lululemon Athletica finished higher after the yoga-apparel retailer posted better-than-expected results. Shares were under pressure for most of the session after the firm handed in disappointing first-quarter and full-year earnings outlooks.

Nike and Accenture are slated to post earnings after-the-bell tonight.

Western Digital surged to lead the S&P 500 gainers after Needham raised its rating on the hard disk drive maker to "strong buy" from "buy" and boosted its price target to $66 from $50. Rival Seagate Technology also rallied.

Diamond Foods dropped after the packaged foods company said it is suspending its dividend payments to stockholders under a new credit agreement.

Shares of payment processor Vantiv and email marketing company ExactTarget surged in their NYSE debut, soaring above their $17 and $19 initial public offering prices, respectively.

A better-than-expected weekly jobless claims report did little to cheer up investors.

Americans applying for initial unemployment benefits declined 5,000 last week to a seasonally adjusted 348,000, hitting a fresh four-year low, according to the Labor Department. Meanwhile, the four-week moving average for new claims fell 1,250 to 355,000.

And leading indicators gained 0.7 percent in February, according to the Conference Board, thanks to improving jobless claims.

But home prices remained flat in January, while February's gain was revised to a mere 0.1 percent growth from a previously reported 0.7 percent growth, according to the Federal Housing Finance Agency.